Avoidance of Goodwill Impairments via Auditor Choice

Abstract

SUMMARY We examine whether companies preemptively shop for a more favorable auditor to avoid timely goodwill impairment charges. We further examine the success and ramifications and the conditions that give rise to these decisions. Adapting the “what if” methodology from Lennox (2000) to the goodwill impairment setting, we find evidence of auditor shopping to avoid goodwill impairment. Shoppers who proactively change auditors exhibit initial success in delaying impairment or reducing impairment magnitude relative to nonshoppers and shoppers who retain their auditors. However, they are more likely to elicit investor suspicion. Audit firms with a larger proportion of new clients who shopped are more likely to receive goodwill-related PCAOB inspection deficiencies. Shoppers who retain their auditor have a greater frequency of goodwill-related critical audit matters. Shopping behavior is concentrated among clients anticipating an equity issuance, when the CEO is more incentivized to avoid impairment, and when audit committees have less financial expertise. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M41; M43.